David Laidler’s EconTalk with Russ Roberts is worth hearing all the way through.
Laidler was one of the researcher assistants to Friedman and Schwartz for their Monetary History, and it is a pleasure to hear two people who can airily refer to “Milton” by his first name, and suggest what he might have thought.
He queries the purely monetarist interpretation of the crisis, saying that late in the day he has learned a grudging respect for the Austrian tradition, in how the latter sees the virulence of the downturn as somehow linked to the speculative folly that went before. This Austrian view chimes well with how politicians see things; the partying got out of hand.
His genteel smackdown of Allan Meltzer’s inflation-fearing views are worth digesting, since they each come from some corner of the monetarist tradition. It’s the money supply not the monetary base that you need to look at, says Laidler. For about 5 years he (and Krugman, and Sumner) have been right, and the Meltzers/Liam Halligans/Lilicos wrong.
But showing admirable balance, I have to refer to his concerns about NGDP targeting (around the 50 minute mark); he felt that Canada had done pretty well with explicit inflation targeting, and given that NGDP data is unreliable and very tardy in its publication, he can’t see how a central bank can really be held down to such a target. In the light of the difficulties central bankers had seeing what was going on in real time (see yesterday post), this is clearly a real concern. I believe the standard answer is to suggest that the Fed/BOE targets the forecast of NGDP, which ought to respond quickly to current monetary policy, just as equity and bond markets do.
I think Laidler’s criticism also gives force to the idea of targeting something more visible and meaningful to the public, but which is known to have strong-ish links to NGDP – such as nominal wage growth. Blanchflower and Posen suggest targeting wages, I understand.
But ultimately I still prefer NGDP to inflation as an objective, for a simple reason. When you get a shock like 2008, it is far better for the health of the economy and the financial system that the resulting recession is inflationary. Deflationary shocks are terrible. It was the first fall in NGDP since the 1930s that turned a financial event into an economic cataclysm. Near the zero bound deflation sets in motion forces that central bankers really struggle to control. It also produces a fairly unjust distribution of the pain, a case summarised brilliantly on Interfluidity. So I still feel that in 2008, the biggest problem was not what the central bankers did, but what they felt they were meant to achieve.